Careful consideration should be given to the terms of the deal and the scope of the due diligence undertaken in order to ensure that the lease will be a good fit for your long-term business needs and acceptable to your construction lender.
Ground Lease Terms and Title
- The title company should deliver copies of all documents referenced in the commitment.
- The entity or individual listed as the grantee on the last deed of record should match the entity named as landlord on your ground lease. Even minor variations in the name (such as missing commas or a different entity type being listed) can prove problematic. Double-check the correct entity name and the status of that entity with your Secretary of State.
- Make sure that the title premium is paid and the title company delivers the leasehold title policy once the lease is executed. The insured party should be the tenant entity listed in the lease and any guarantor required by the lease.
- Review applicable mortgage documents listed on the commitment to determine if lender approval of the ground lease is necessary. Existing loans will need to be subordinated to the ground lease, and those documents recorded in the real property records in the county in which the property is located. An attorney can assist you with preparing the appropriate subordination forms.
Reviewing the Survey, Zoning, and Condition of the Property
- Survey: Complete and review an ALTA survey of the property before executing the lease. Pay attention to existing utility facilities and public rights, and compare them to the proposed construction plans.
- Zoning and approvals: Confirm applicable zoning designations and regulations with the city planning and zoning department. If the current zoning doesn't permit your planned use, you will need to seek a zoning variance. The lease documents should allow you to terminate the lease if the correct zoning or city approvals aren't acquired.
- Environmental/Condition of Property: Complete a Phase I and Phase II investigation of the property, as well as an on-site inspection.
Ground Lease Negotiation Considerations
Typically, rent is either tied to the market or determined up front for the entire term fo the lease. If you're using market rents, make sure to carefully craft the terms of how “market” will be determined. Will rent be based on the then-current use of the premises, which is favorable to investors, or based upon the then highest-and-best use, which is less favorable?
Additionally, ensure that the lease allows for easy assignment and subletting to third parties.